Commodity ETP Weekly: Strong US and China Manufacturing Data Bullish Commoditie

The US Federal Reserve’s post-policy meeting statement last week was less dovish than the market expected, sending the US dollar up and pulling dollar sensitive assets such as gold down. ….

ETF Securities Research

The statement removed references to tightening financial conditions and made no mention of the partial Federal government shutdown that some were expecting to see.

There is no pre-commitment to further easing or tapering and so the Fed’s policy decisions (and therefore markets) will likely remain data-dependent. Cyclical assets received a boost towards the end of the week as Chinese official PMIs confirmed that the manufacturing sector continued to grow at a faster clip than the previous month and the US ISM continues to power ahead.

The strong numbers helped reduce the jitters caused by a short-term sharp rise in China’s interbank rates as the central bank’s fund injections were not large enough to match outflows due to corporate tax payments. We believe this is a short term issue that will be resolved relatively quickly and markets will ultimately continue to focus on positive growth numbers.

ETFS Daily Leveraged Natural Gas (LNGA) saw US$17.3mn of inflows as investors viewed price decline as good entry point. Henry Hub gas prices slid 1.3% last week, attracting new investors. With the EIA forecasting a colder-than-normal winter in the Northeast, we believe that the Henry Hub price could move to the upper end of its recent trading range to $4.5MMBtu by the end of Q1 2014 from the current $3.6MMBtu. Last week’s flows were highest since August, when warm weather was still driving air-conditioning demand for natural gas.

US$14.3mn flowed out of ETFS Palladium Trust (PALL) as prices edged down. Despite strong Japanese and US vehicle sales data, the palladium price fell 0.9%, mainly driven by a stronger US dollar. Platinum on the other-hand rose 0.2% likely affected by the strike at Northam, the world’s fifth-largest platinum producer and reports of potential strikes at Impala Platinum and Lonmin. As palladium is mined as a by-product of platinum, we believe that supply conditions will remain even tighter for this metal and lead to price gains in the coming weeks and months.

ETFS Copper (COPA) saw US$6.4mn of outflows before the release of positive China PMI numbers. With some investors still fearing China may move into lower growth mode, any indication that at the plenary meeting next weekend that the status quo on growth will be maintained could be a catalyst for further optimism in the copper market.

Dichotomy between East and West gold demand continues. Since the beginning of the year, China has imported 856 tonnes of gold net, 54% more than in the whole of last year. Meanwhile the festive season in India has seen demand for the metal remain buoyant despite the efforts by the government to stem imports. By contrast, we continued to see outflows from gold ETFs last week (US$8.8mn) as a slightly less dovish than expected statement from the Fed, pared back investors’ expectations of policy easing.

Outflows from long sugar ETPs highest since April. The sugar price corrected 3.5% last week as investors revised their global supply expectations upwards. There were US$3.1mn of outflows from long sugar ETPs. As the Brazilian harvest comes to a close and the Indian harvest starts with strong export orders, we believe the price has more downside.

Key events to watch this week. As usual, the market will focus on the US non-farm payrolls, although the partial Federal shutdown during the month will dull its importance. A plethora of service sector PMIs followed by policy meetings at the European, Australian and UK central banks could provide a catalyst for price movements. Any government comments on China’s third plenum meeting scheduled to start on 9 November will be watched carefully for cues on policy direction.




Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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